WASHINGTON (CN) - The U.S. Department of Education was justified in using reported income of graduates as a measure of whether beauty school students qualified for federal financial aid, but made it too arbitrarily difficult for the schools to challenge its determinations, a federal judge ruled.
As recounted by U.S. District Judge Rudolph Contreras in his June 28 opinion, the plaintiff American Association of Cosmetology Schools argued that an Obama-era gainful-employment rule threatens for-profit schools’ access to federal student aid if they saddle their graduates with too much debt relative to their earnings.
In a federal complaint filed in Washington on Feb. 3., the association said the rule is harmful when applied to cosmetology schools because their graduates typically underreport the income they receive as cash tips.
The Obama administration tightened that standards on for-profit schools, forcing them to demonstrate that graduates have found gainful employment that will allow them to pay off their student debt.
If they don’t meet certain requirements, the schools risk not being eligible to participate in the government-student-loan program.
The association did not challenge the rule itself, but rather the use of Social Security Administration data on income to make the debt versus earning calculation.
Before the rule went into effect, the opinion says, “Several commenters argued that use of SSA data would be unfair to, among others, cosmetology programs, because their graduates disproportionately underreport their income due to high levels of cash-based and self- employment-based earnings, including tips.”
“The commenters suggested that the Bureau of Labor Statistic’s [sic] survey-based data would better account for unreported income,” the ruling continues.
The Education Department rejected the proposed solution, maintaining the Social Security Administration numbers are the only means of determining income and that graduates who don’t report their income are subject to civil and criminal penalties.
The association fired back arguing that “these responses were unsatisfactory, and thus the DOE arbitrarily and capriciously failed to adequately consider the unreported-income issue when it promulgated the regulations.”
The association said its many of its member schools are already experiencing difficulties because of the rule.
“In fact, at least three schools have already posted warnings to their students, because they could not feasibly appeal their failing grades," the association said.
Both sides moved for summary judgment. Contreras granted the association's motion, but denied its additional request for injunctive relief.
Contreras found tht the Education Department did act arbitrarily and capriciously with respect to the reporting requirements, and in fact, "openly acknowledged that underreporting is an issue, even identifying cosmetology schools by name.”
In order to remedy the situation, Contreras ordered the department not to enforce the numerical survey requirements currently in effect against association member schools.
"In effect, this removes the arbitrary and capricious reasoning behind the otherwise-valid premise that alternate earnings appeals justify the presumptive use of SSA data," he wrote. "It also avoids upending the entire regulatory scheme and means that AACS member institutions need not secure any specific amount of survey responses or state-sponsored data to raise an appeal."
Contreras went on to say that with his order "AACS member schools will have broader, more feasible options to challenge their D/E rates before they become final, and the DOE will be able to decide, on a case-by-case basis, what modicum of evidence is enough to overcome the presumption in favor of using SSA data for each particular program."
"This remedy will also lead to more tailored administrative-appeal records for District Courts to review in lieu of broad challenges to the overall regulations," he added.
O. David Jackson, executive director of the AACS, called the ruling "a terrific victory for AACS, its member schools, and the cosmetology industry."
"The court’s language is very forceful, and throws out the department’s hear-no-evil, see-no-evil approach to earnings data it knows is wrong," Jackson said in a statement. "We are thankful to our AACS membership who stood strong in challenging the weaknesses in this rule.”
Robert Shapiro of Duane Morris represented the plaintiff.
A representative of the Department of Education did not immediately respond to a request for comment.
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